Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions] Thank you. And I will now turn the conference over to Jane Gelfand, Director of Investor Relations, Corporate Development and Capital Markets. Ms. Gelfand, you may begin your conference.

Good morning, and thank you for joining us. Today, we will review our second quarter 2022 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; Michael Fleisher, Chief Financial Officer; and Kate Gulliver, incoming Chief Financial Officer and Chief Administrative Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the third quarter of 2022. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2021, our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our Investor Relations website. I would now like to turn the call over to Niraj.

Thank you, Jane, and good morning, everyone. We are pleased to reconnect with you today to share the details of Wayfair's second quarter results. 2022 is proving to be a volatile year. While the Fed and other central banks worked the curb inflation and stabilize the global economy, we will remain squarely focused on our customers and our suppliers and on making sure Wayfair is their preferred platform for the home in any environment. We're also very focused on controlling the controllables and steering Wayfair in a financially responsible manner through this period. On each of these fronts, we are seeing positive traction, and this is what I'll talk to you about today. Q2 net revenue climbed 10% quarter-over-quarter, that was still down 15% year-over-year. Though year ago comps will begin to normalize in the back half is unmistakable that consumer behavior is being impacted by inflationary pressures as well as by economic and geopolitical concerns. Even so, the emotional connection to one's home means that interest in our category is ongoing, and we're seeing consumers remain engaged and responsive to the right combination of wide selection, great deals and satisfying service. Wayfair's platform model flexes to deliver this outcome across different macro environments, and we're seeing it do so today. For the last couple of years, we have indicated that Wayfair should now be at the scale to drive both growth and consistent profitability. The first half of this year has admittedly been less robust than expected, but let me be very clear that our intention is unchanged. We are laser focused on quickly getting back to this goal. Our priority over the coming quarters and looking into 2023 is to steer the business towards positive adjusted EBITDA and positive free cash flow, but we will not stop there.…

Thank you, Niraj, and good morning, everyone. I'm going to start today by walking through some of our high-level planning as we look out to the remainder of 2022 and into next year. Since late 2019, we have been focusing on becoming sustainably profitable and cash flow generative. Our progress towards this goal accelerated during the pandemic, but reversed somewhat over the last several quarters. As soon as we started to see the macro environment moving away from our going-in expectations for 2022, we began taking swift action to reposition the business and a return to positive free cash flow in a timely and thoughtful manner. This is a goal that the whole executive team shares, including Kate, who is closely partnered with me as we continue the CFO transition in real time. We are laser focused on what it takes to achieve this goal, which means not just returning to profitability on the adjusted EBITDA line, but getting back to a level that covers expenses like D&A and the cost of paying our employees in equity. To do this, we have undertaken a broad prioritization exercise across the organization, including a timing shift in our semi-annual planning process, and taking a microscope to each part of the business as we reassess what the appropriate cadence of investment should be across a range of macro scenarios. As you can imagine, we're quickly bucketing projects across a range of priorities, focusing on uniting the organization against the most strategic items while sequencing out other initiatives. Niraj just listed off several of these earlier, and you'll see us enact more changes in the second half of 2022 and in 2023. Turning now to the second quarter results. As you saw in our press release this morning, Q2 total net revenue was $3.3…

Thanks, Michael. Over the past several months, many of you have asked about the path to profitability and how long it will take us to reach our goals. Let me first be clear about our financial priorities. We are steering Wayfair to be cash generative. We are also establishing a lower bound on profitability that we will stick to, all while working to drive margins even higher. Why is this lower bound Important? At a mid-single-digit adjusted EBITDA margin, higher in the US as international continues to mature, we should be able to cover expenses like depreciation and amortization associated with CapEx and begin to mitigate the dilution associated with equity compensation, all while continuing to invest in future growth initiatives. While we are perhaps being more pointed about how we're talking about this, this practice is not new to us. Steve and I operated this business in a cash-generative way for more than a decade when we started. And starting in 2019, we have been moving Wayfair back in this direction, admittedly with a lot of volatility in between, which brings us to how and when we will get there. You should expect to begin to see progress starting in Q4. But the reality is that this is an iterative exercise. We are philosophically committed to this set of financial goals, which means that we are constantly evaluating what's happening to the customer and the economy, the time frame over which we can responsibly get to these levels and adjusting as needed. The macro can help or slow us down some, but we are not relying on solely the top line to get us there. As I mentioned earlier, we're in a fortunate position where large parts of our platform business are variable, designed to move more or less…

Thanks, Niraj, and good morning, everyone. I'm excited to meet some of you and to reconnect with others over the coming months as I step into the CFO role. One question we know is top of mind from many investors right now is our liquidity profile and capital structure. As we sit here today, we see our liquidity position as healthy. We ended the quarter with north of $1.7 billion of cash and short-term investments on our balance sheet. And don't forget that we also have a revolving credit line of an additional $0.5 billion available to us. So where we are right now at $2.2 billion to $2.3 billion in total liquidity and with no meaningful near-term maturities is a relatively comfortable place to be. But as you also heard us say, we're very focused on getting to a state of positive cash flow as quickly as practicable to the total liquidity growth. We have the benefit of a cost structure that is highly variable, options on how to control elements like OpEx and CapEx and also the benefit of a net working capital flow that typically works in our favor. Getting to a position where we are sustainably generating cash is very important to us. But it is not an overnight thing for a business of our size. However, we are aiming to make steady progress over the coming quarters, which will begin to show up in the financials in Q4. We hope this is helpful additional color to frame our thinking. Let's now move to the open Q&A. Please feel free to direct your questions to Niraj, Steve, Michael and to me.

[Operator Instructions] And we will take our first question from Steve Forbes with Guggenheim Securities. Your line is open.

Good morning and thank you all for the color today. Niraj, I wanted to start with the supplier base, right? You mentioned how the suppliers are using more of Wayfair services offering. But maybe if you could just expand on how they are engaging? What's different today than last year? Whether they're competing for certain services via lower wholesale cost? Just any additional color that helps us better understand how the supplier community is viewing Wayfair today?

Yes. Great. Thanks, Steve. Yes. So what I would say is, if you think about our platform business model, one of the things we mentioned a couple of quarters ago is, generally is an advantaged model. The only time its disadvantage would have been the example in the back half of last year when there's too little inventory relative to demand, which basically almost never happens. What's common is that there's roughly a balance of the two or in these kind of tougher macro scenarios where there's far more inventory than demand. Well, that's actually the scenario we're in now. So suppliers basically have too much inventory. And so what we're seeing happen is our inventory availability levels have gone up. Suppliers have too much and they want to sell that inventory. So what do we see them do? We see them using some of the pricing tools we have on our platform to basically allow them to control their price to be aggressive where they want to move inventory, that creates value for the end customer, drives up conversion. We're seeing them become increasingly large adopters of CastleGate. CastleGate basically facilitates them getting high-speed badging, which drives up conversion. It also facilitates lower retail prices because the outbound ship cost drops, which also drives up our conversion as an example there, our two-day speed badging is up about 10 percentage points. And so we're seeing them leaning on aspects of the model and other piece of the model. That's still pretty small force relative to others is advertising. And that's something that has been growing over time. But frankly, we're seeing a lot of growth and interest there too, as we're adding sophistication of the product, but frankly suppliers are in a position where they want to sell more goods. So these are these are kind of the types of things that are happening. There advantages we have relative to others, and frankly, it's why we -- it's kind of the inherent strength of the business model.

Helpful. And then just a quick follow-up. Really about international, right, given the comments about balancing the long-term investment and the path of achieving a mid-single digit EBITDA margin. So curious, Niraj, just additional high-level comments on how you're thinking about the broader international opportunity? Has it changed? Should we expect you to pause expansion for a multiyear period of time into new markets and really just focus on the core that you're in? I mean, is there any -- are you seeing anything that deters the opportunity that you see in the UK, or Germany? Any higher level color as you're thinking about the broader opportunity in international?

Yeah. Thanks, Steve. Yeah. Right now, there's no question that the macro environment in the international markets we're in is tougher than even the macro environment in the United States, and then that's certainly not great for that segment of our business. That said, one of the things I did mention in the prepared remarks is we have been very thoughtful about in this period of time. What do we focus on? And what does that mean we need to pause or where do we narrow our focus. And frankly, in the European market, we said let's focus on the UK and Germany. We built a leadership position in the UK We're on the road to that. We're not there in Germany. Well, let's pause moving to other international markets in Europe. Let's pause our expansionary focus in Europe. Let's focus on our core. And that's what we're doing there. And the way we think about it is there's no -- there's nothing that we decided yesterday that will automatically remain committed to today. So we're going to constantly reassess what we're doing. But we feel very good about the strategic long-term focus that we have in the company, but we're also very cautious given the macro of making sure that we're not expanding them. And in fact, anything we're going to continue to do that we think makes sense in light of how we're thinking about the P&L, how we want to drive the EBITDA profitability, how we want to drive the free cash flow. And we want to show that steady progress there and get there, frankly, in a time frame that we think quite fast. And so this is the balance that we're taking.

Thank you.

And we will take our next question from Peter Keith with Piper Sandler. Your line is open.

Thanks. Good morning, everyone. Appreciate on the extra commentary. On the mid single digit low threshold EBITDA margin target, obviously, putting a time frame on that's going to be possible. But what are the thoughts on the revenue growth needed to achieve it? Could you show significant progress over the coming year if revenues were to remain flat year-on-year to reach that goal?

Yeah, Peter. So I think on one hand, you're absolutely right, the macro does affect it. However, I will say our plan on making progress to get to EBITDA profitability and positive free cash flow is not contingent on expecting the overall revenue to expand. So does the shape of the curve get affected by the macro? Absolutely. But is our plan hinging on revenue growth, it's not. So why do we say it that way? Well, do we expect to see us take share and get revenue growth? We do. However, the macro is very murky. So to bet on a plan that requires a certain amount of revenue growth, we would view as risky. So the core of the -- when we say you're going to see steady progress, that does not assume that the market turns right around.

Okay. That's helpful. A follow-up question maybe to what Steve asked just around the supplier services. I'm wondering if there's any quantification you could provide just to show us some progress that you're making. The CastleGate revenues have come down to about 20% of total, at least that was as of Q4. Maybe update us on where you stand today? And then any quantification too, on that, that sponsors to advertising and maybe how that's increasing as a percent of revenue would be very helpful.

Sure. So on CastleGate, what I'll say is, CastleGate penetration is ramping and it's been -- all year, been increasing at a nice pace. And so, when we said that it's on track to hit record highs to meet old record highs and then exceed them. We see that happening not over the long term but rather over the near term. So we're seeing very good adoption there. Frankly, that adoption was taking place even before the demand really started to turn down, and then it's only accelerated since then. So suppliers are very interested in benefiting from the speed badging, benefiting from the lower retails, the lower outbound ship cost, the customer conversion. And so that CastleGate penetration is, I would say, meaningfully higher than where it was at the beginning of the year, and it's on track for these types of records that I mentioned. On advertising, we haven't given out an exact number on that, but this is not super helpful for you to quantify, but I'll just say it's certainly growing faster than the overall business is growing at very fast relative to the overall business. But it's still small, quite small relative to what we think the potential is. So it's still very much in its early days.

Yes. Said another way on advertising, its still -- there's still a huge upside on gross margin in that product.

Okay. Thanks so much. Very helpful.

We will take our next question from John Blackledge with Cowen. Your line is open.

Great. Thank you. Two questions. First on just the revenue trends thus far. Could you just discuss the drivers of the current revenue pacing in 3Q? If I heard it correctly, Michael, I think you referenced that 4Q net revenue would likely be up Q-over-Q. I just wanted to check on that. And then on the 3Q gross margin, what are kind of the drivers that provide confidence that gross margin will come in kind of at the high end of the 27% to 28% range? Thank you.

Great. So let's do revenue trends first. Let me say some thoughts and Michael can comment on his quote. But I think everything you said is correct. So revenue trends, so we said in the script that quarter-to-date is down roughly 10%. The revenue trends, frankly, we are seeing we, I wouldn’t say -- good, I don't know, I describe good traction on revenue, meaning we're seeing customers being engaged. The macro is clearly softening. There's been a shift from goods to services. But things like, for example, the percentage of revenue coming through the app is -- it's at an all-time high, except for the first two COVID quarters. And so, there's things like that, that are happening that we think are positive things that we're seeing with our customer base that is engaged, but engage with in the context that HomeGoods is not top of the agenda right now. We're also seeing that our suppliers are leaning in on the platform to sell goods. As I mentioned, they're over-inventoried. They're lowering retails. What we're finding is that, that creates an opportunity for customers to get more value, the speed of delivery of these items is up, which is a great customer, kind of, experienced driver, we're then creating the sale events and these promotional events, for example, we launched one a couple of weeks ago called Flash Sale Fridays. It's only two weeks old, and it will build up over time, but it's off to a very good start. And so what we're doing for showcasing that value to customers. Customers are then quite curious. We're getting good reaction from customers coming in, browsing and buying. And so this is a playbook that we've used in the past, and it works very well, because customer’s -- it’s not that they don't have money, but they need an excuse to spend it. So when they see value, interesting, when they don't want to pass it up that, that's when they buy. So we're seeing positive momentum on revenue based on that we expect, of course, fourth quarter to be bigger. But Michael, anything I don't know exactly what you're…

No, I would just confirm what I said in the prepared remarks, John, that we do expect that the fourth quarter, the fourth quarter is always a better quarter, bigger quarter for us, and so share is the biggest share quarter. Obviously, the macro environment is super uncertain, but we feel pretty bullish about when we look out from Q3 to Q4. And as Niraj just talked about a couple of times now, I think the underlying business model that we have and how that performs in this environment sets us up extremely well, both to serve our suppliers but also serve our customers, right, when they are looking for the best deal on something that they need. And I think that's the other -- sort of to your other question about like why do we feel confident talking about the upper end of our 27% to 28% gross margin range. It's really because this is where our business model can shine when there's an oversupply in the marketplace. And we're the -- we are the best place for suppliers to move that product and we are the best place for our customers to come find deals on the things that they want to buy. And then on the second part of your question, John, about gross margin. So we talked about -- starting a year ago, we talked about there being like a 1,000 basis point runway that we could quantify between four bit levers. One, meaning as we grow in volume, the efficiency associated with growing in volume. The second pillar was around is items become increasingly exclusive and we lean on red carpet merchandising, the demand response curve is there and the price elasticity. Third was a pillar around logistics. And the fourth was the pillar around…

Thank you. Thanks so much.

Thanks John.

We will take our next question from Oliver Wintermantel with Evercore ISI. Your line is open.

Thank you. And, Michael, thank you very much for all the help over the years, and Kate, looking forward to working with you again. So my question was just a clarification question from the guidance for next year, when you said EBITDA positive. So do I hear that right that most of that should probably come just from reduced costs and most of that from the OpEx line, is that correct?

So let me just make a couple comments and then I'll turn it over to Kate or Michael to maybe specifically answer your question on what they said for the guidance. But what I would say is -- the way to think about it is, we have a plan to get to EBITDA positive and then to free cash flow positive, that really is not counting on revenue growth being the reason and the way we get there. So in that sense, you would say there, obviously, is -- their internal drivers past revenue growth. Now I will highlight cost is one element of it. And costs can manifest as lower OpEx, for example, it can manifest also, for example, as higher gross margin. And we just talked a little bit about gross margin. So think about all the different aspects adding together to why can we get there without revenue perhaps growing dramatically. And then, obviously, we do expect revenue to grow as well. And frankly, there's more gross margin and more things over time that we expect to get also. So there's a number of pieces that add together to this trajectory that we say you'll see steady and continued progress. And we talked about a level obviously much higher than EBITDA and zero that we're working towards. But Michael or Kate, I don't know if you want to add anything.

Yes. First of all, Oli, thanks for the nice comment. So I do think that, as I mentioned in the prepared remarks, we think there's a lot of opportunity to really examine everything in our cost structure and understand where we can run in a more efficient way. At the same time, still protecting the investments we're making that are really critical to sort of the long-term growth and the long-term success of the business and the opportunity. And so, I want to be careful not to sort of say, it's like, in this one line, right? It's like not just OpEx or not just CapEx, but rather this is a more holistic view looking at everything we're doing, understand what the most important priorities are, making sure that we've got all of our people and teams and resources focused off against those, and then on the things that we can either push off to the future or cut out completely, how do we do that and do that in a pretty thoughtful way. You can't do all of that instantly, which is why you're not seeing a change in the results in the Q3 guide. But when we look out over the back half of 2022 into 2023, I think that's when you'll start to see some of that performance flow through.

Yes. Great. Thank you. And the only one follow-up quickly is on customer retention. Looking at the active customer trends and how you try to reverse that and what you've seen in retention rates? Thank you.

Yes. And so, there, what I would say is, there's definitely -- when we say the macro is soft in HomeGoods, that then has an effect to our customer base, the degree to which they're proactively engaged in searching. But what I would say is, we're seeing -- there's kind of a -- the active customer trend requires them to buy within 12 months. There's predecessor trends around like, are they still engaged, meaning are they opening the e-mail? Do they have the app? Are they engaging in the app? Are they visiting the site? Are they clicking on the e-mails or clicking on app notification? And like, for example, we have 60 million people who've downloaded the app. And so we kind of can measure these things. We have numbers that make us feel good about how we're doing relative to the macro demand, but the truth is the macro demand is soft as well. So I think that's what you're seeing in that number. It's the net of the two.

Got it. Thanks very much and good luck.

Thanks Oliver.

We will take our next question from Anna Andreeva with Needham. Your line is open.

Great. Thank you so much. And thank you for all the color this morning. We had two quick questions. Just on quarter-to-date as a follow-up. I'm curious what kind of trends are you seeing in Wayfair.com in the US, you guys had previously provided that color. And then secondly, you mentioned that you're seeing some trade down in the portfolio. Can you talk specifically what categories that being seen? And are you adjusting prices lower as a result. Thank you so much.

Yeah. Thanks, Anna. On quarter-to-date, I mean, one thing I'd say Wayfair.com is a particularly large piece of our business. And so it's very hard for the total business to move super far away from Wayfair.com, for example, last quarter, the US segment, I think, was down like 9.7%. Wayfair.com was down just a tick higher than that, right? So even though have other pieces growing in the US, and so wafer.com, obviously, is a piece of shrinking. It can't be far from the total US number. Well, International is still performing far worse than the US is. So when you take the quarter-to-date number, you can use the international US splits that you've been seeing and think about it that way. And then that US number is basically going to tell you a Wayfair.com number. So I think that's the way you should think about that. And we're, obviously, paying attention to that. And the trade down, the way to think about that is when we talk about trade and what we do is we don't look at total AOV, we look within a class of goods. So in other words, the average price of a bed or the average price of a rug, is that moving down. And so -- and what you see is like generally, you're looking for a pattern across the board, which is what we see in times like this. So it's not that specific types of goods are getting traded down, other types of goods aren't. It's more a little bit across the board. Now in terms of pricing, this is again, the benefit of our platform model, the way pricing gets read to is that suppliers decide what they want to do on their wholesale price. And we're seeing suppliers basically leaning…

Thanks so much. Makes sense guys.

Thank you.

And ladies and gentlemen, that concludes our question-and-answer session for today. At this time, I would like to turn the call back over to management for any additional or closing remarks.

Well, great. Well, thank you, everybody, for joining us today. We are happy to spend the time with you and excited about your continued interest in Wayfair. Thank you very much.

And ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.